The S&P 500 has rallied 32.6% since Donald Trump’s unexpected US election victory in November 2016, according to FE Analytics.
Equity allocations reduced across households in the lead up to the election and rebounded afterwards but Republicans increased their equity allocations 0.4% more as a percentage of their wealth than their Democratic counterparts, according to Belief disagreement and portfolio choice, a paper published by researchers from the Sloan School of Management, which analysed trillions of dollars of household wealth.
Despite Trump winning the presidency, a back of the envelope calculation by the authors suggests partisan behavioural bias from investors may have seen net demand for equities in the six-months since the election fall $3.3bn due to Hillary Clinton winning the popular vote. The Democrat candidate won 48.2% of votes compared to Trump’s 46.1%.
The average household income in the sample was $101,600 with $156,500 in investable wealth. The researchers used anonymous account data from a large financial institution for their data set and zip code information to determine likely voting patterns.
Partisan bias among investors
Republicans were slightly pessimistic about the US economic outlook in the lead up to the election and switched to highly optimistic on Trump’s win, whereas Democrats’ outlook swapped in the opposite direction, the researchers noted. Political party affiliation is likely to affect investors’ worldview and elements of confirmation bias come through in the results, the researchers said.
In fact, Democrat presidents have presided over the strongest Dow Jones Industrial Average returns delivering 46.4% during the average term compared with 26.7% for Republican presidents, according to data compiled by AJ Bell. However, in Trump’s first year in office the US large cap index performed strongly, gaining 31.5%.
Dow Jones returns during US presidential terms
|Election||President||Dow Jones Return|
|1960||John F Kennedy *||41.9%|
|1972||Richard Nixon **||-1.5%|
|1988||George Bush Sr||52.2%|
|2000||George W Bush||0.0%|
|2004||George W Bush||-17.7%|
|2016||Donald Trump ***||33.0%|
Source: Thomson Reuters Datastream, AJ Bell Research; * John F Kennedy assassinated in November 1963 and replaced by Lyndon Johnson; ** Richard Nixon resigned August 1974 and replaced by Gerald Ford; *** Trump data as of 4 October 2018
The rally was unlikely to shift Democrat investors’ world view and instead they would just start creating more complex arguments to support their narrative, says Oxford Risk head of behavioural finance Greg Davies.
“The stock market keeps going up and the Republicans go ‘this in incontrovertible evidence of what a great president we’ve got’, whereas the Democrats could say ‘this is incontrovertible evidence that Trump is initiating short-term business-friendly measures that are going to be harmful to the economy in the long term’. Both of them just end up more and more strongly confirming their own pre-held positions,” Davies says.
During Barack Obama’s first year in office the Dow Jones grew 33.4% marginally above the index performance under Trump.
Republican investors could get burnt
Bullish positioning could soon backfire for Republicans as the Trump agenda shifts from tax reform to trade wars.
Tax reform has lifted the US market by about 4-5% whereas the US trade war with China will undo some of those gains, says Miton US equities manager Hugh Grieves. Changes to the North American Free Trade Agreement (Nafta) had been “cosmetic” and he expects any negotiations with the European Union would be similarly inconsequential.
However, he expects the effects of the China trade war to emerge in corporate profitability in the next six months. In the likely scenario Trump further increases tariffs, inflation and US interest rates will also be affected.
Grieves says: “The idea that Trump has been a big positive and is now turning into a negative is quite important for the market. For the last two years, the market has gone through this economic acceleration phase and all these tailwinds have gathered to push the economy along.
“Economic growth is about as high as it has been for this cycle. The economy is not likely to accelerate from here and is actually more likely to decelerate from here as the good Trump benefits disappear in the rear-view mirror and the bad Trump negatives get larger.”
In August, Trump suggested the stock market would crash if he was impeached. Grieves says the comments should be taken with a pinch of salt.
Democrats more ready to buy trade war narrative
Republicans and Democrats are both likely to reduce equity holdings if the trade war narrative takes hold and hits the stock market, Davies says. “But the Democrats are likely to be reducing it by more because for them that trade war story is more emotionally accessible, it’s more believable, because it’s something they want to believe in.”
He adds: “The findings are not saying that an investor’s actions are entirely dominated by their viewpoint. It’s saying that political viewpoints will influence the extent to which investors will act on that.”
However, increasingly partisan politics had likely amplified the behavioural biases of the Republican and Democrat investors in the study, he adds.
While the research was based on retail investors, Davies says the results are translatable to professional investors, albeit on a more muted scale. “The general findings with regards to biases between retail and professional investors is that professional investors are not immune to them; they’re influenced by emotions and beliefs in the same way. But professional investors are likely to spend more time and have better processes to try and tackle it so the effects would less on the whole for professional investors.”
The paper’s findings reflect similar behavioural biases among UK voters following the Brexit referendum, according to a Lloyds Private Bank survey published in March, he adds. That showed Brexiteers were more likely to favour UK equities whereas Remainers were more likely to favour eurozone equities.
Fund picks for a shifting US stock market
Attempting to forecast exactly when the US economy might turn can be very damaging to long-term performance, says Adrian Lowcock, head of personal investing at Willis Owen.
However, late in the cycle a long/short fund, like Artemis US Extended Alpha, should be able to take advantage of more shorting opportunities as the market becomes more expensive, says Lowcock. “The issue with North America is you don’t tend to get the range of defensive funds as you do here, the culture and opportunity is much more about growth which means that market volatility is par for the course,” Lowcock says.
Alternatively, he suggests investors could choose a fund like Merian North American Equity, which can shift between value and quality according to market dynamics.